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December 8, 2000

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Cree

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Subject:  I spoke with Cree's CFO
Author:  TMFOrangeblood

Hi Cree-tins,

As always, I am extremely pleased with this board and the way it questions everything it can get its hands on. I've said it before: This could very well be the best discussion board on the Internet.

After reading over some posts here (thanks amynorcom, TinkerShaw, foxhedge, wildhart, etc.), I talked with Todd Lebor (TMF TeeTime) who is extremely sharp on the accounting end. I then emailed some questions to Fran Barsky (Investor Relations Manager) and received a phone call from Cynthia Merrell, Cree's Chief Financial Officer. Here is the best summary I can give:


First item:
==========
One question that has come up references Cree's relationship with MVIS. Your latest 10-K says:

"As development costs are incurred under the original and amended contract, funding from MVIS is offset against these expenses. During fiscal 2000, approximately $3.1 million of funding from MVIS was offset against research and development expenses."

Where is that $3.1 million accounted for? By offset, do you mean R&D was actually app. 10.1 million but not actually accounted for as revenue?
==========

Merrell said the $3.1 million was accounted for as a reduction in R&D expense, so the $7.054 million would actually be closer to $10.1 million. Merrell said as MVIS is trying to get the blue laser product, it badly needs Cree's help, and therefore Cree incurred additional expenses as it accelerated its own R&D spending. MVIS's $3.1 million is basically a reimbursement to Cree for the additional expenses Cree incurred. So it is not in any way a matter of Cree padding its income statement because the bottom line would have been the same if MVIS never existed. This was reviewed by Cree's auditors, and certainly passed through every analyst that covers the company with no problems.

So, we can now have our answer to this from Herb Greenberg's article:

"(Put another way, if those R&D expenses had been shouldered by Cree, its fiscal year 2000 operating income would have been about 8% lower, and earnings per share would have come in 3 cents lighter than analysts' expectations.)"

If we are to believe Merrell, there is nothing here to worry about.


Second item:
==========
Also, I'm trying to figure out where the sale of MVIS stock (app. $3.6 million) was accounted for. Is that the "sale of security investments" noted below from your press release announcing the year-end results (dated July 27)?

"Therefore, the historical operating results of Cree Lighting Company are included for the quarters and years ended June 25, 2000 and June 27, 1999 and all prior periods. Included in the quarter, the company reported a one-time charge associated with the acquisition, which was offset by a gain on the sale of security investments. "
==========

Merrell said the sale of the MVIS stock netted $4.1 million, and that was mostly offset with the $3.1 million in one-time expenses associated with the Nitres deal. (You'll notice the $0.656 million under "Other non-operating income" on the income statement.)

So this sale of stock also was not used in any way to fluff-up the earnings. Certainly if anything like that were to happen with any company, it would be noted as a one-time gain... just as the Nitres deal was a one-time charge. As you know, most of the time earnings are reported as "x cents, or y cents excluding a one-time gain/charge" etc.


What did Ms. Merrell have to say about Greenberg? For starters, she's like the rest of us in that she can't understand why he is still talking about C3. Personally, I feel extremely confident in saying there is nothing else left to talk about regarding C3 (barring new information). She says that shorts will latch onto most anything they can.

Furthermore, Merrell says Herb has made some false statements about Lighthouse. For instance, Herb's story says:

"Well (and this is where it starts to get interesting), not far from Cree's headquarters in Durham, N.C., is the U.S. headquarters of Lighthouse Technologies, which was known as Real Color Displays when it was a subsidiary of Cree. Lighthouse has the same management and many of the same employees as it did when it was part of Cree."

Merrell says Lighthouse was not formerly a Cree subsidiary, and only two employees went to work for them.

As far as the UltraRF deal... Merrell indicated Cree is not going to go out and make deals just to set up relationships to pad the income statement. She says any deals Cree makes are because the companies offer a strategic fit with their long-term goals. So, Herb Greenberg asks:

"In the cases of Microvision and Spectrian, isn't Cree merely taking money off its balance sheet, handing it over to another company, and having it come back, one way or the other, into its income statement? If not, why? And why shouldn't Cree investors be concerned about its related party transactions?"

These are good questions. Assuming Spectrian's deal is similar to the MVIS deal, the answers to those questions are "No," "Because these would not be expenses Cree would have incurred if MVIS never existed," and "Well, we will certainly look with a critical eye at anything they do.... thanks for making us think."

I think I've addressed most all of the concerns raised in prior posts, though I may have missed some. If so, bring 'em on and let's discuss them.

Cheers,

orangeblood
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